AUD risks, CHF speculation, CAD upside

News that the IMF revised up its global growth forecasts, decent demand for a Spanish bill auction and a stronger than expected reading in the April German ZEW investor confidence survey helped to calm market nerves overnight. Some solid US Q1 earnings also supported equities too.

Weaker readings for US industrial production and housing starts were largely ignored. Hopes of an expansion of IMF funds were boosted by the news that Japan will be provide an extra $60 billion. High beta currencies rallied overnight but notably the EUR failed to register gains despite a narrowing in peripheral Eurozone bond yields.

AUD has undergone some major gyrations. The boost from by a strong jobs report last week was quickly undone by a relatively dovish set of RBA minutes, which appeared to confirm the view that a rate cut would take place in May. Of course, as the RBA pointed out the April 24 Q1 inflation report would be essential to provide the final clues to the rate decision.

As a rate cut is already priced in, an upside inflation surprise may actually result in a bounce in the AUD but any positive impetus will have to contend with a more fragile risk environment, yesterday’s risk rally not withstanding. AUD is one of the most highly sensitive currencies to risk aversion and bounced overnight as risk appetite improved but we suspect the risk rally will fade in the short term putting the AUD under renewed downward pressure.

EUR/CHF continues to track the 1.20 ‘line in the sand’ closely, but rumours of a shift in the floor continue to do the rounds. Swiss officials have not confirmed such speculation but have highlighted the impact of a strong CHF in fuelling deflation pressures. The case for a move higher in the CHF ceiling is therefore quite high, but the cost could also be high if speculators test the resolve of the Swiss authorities.

Although the Swiss economy continues to suffer it appears that the pain of a strong CHF is lessening slightly although not enough to ease concerns about the strength of the currency. The March KoF Swiss leading indicator revealed a second straight increase, albeit from a low level. Further gains may be limited however, given the ongoing downward pressure emanating from weaker growth in the Eurozone.

The Bank of Canada left policy rates unchanged at 1% but the accompanying statement appeared to pave the way for higher interest rates. Consequently expectations of rate hikes have been brought forward, with the CAD rallying due to its strong correlation with interest rate differentials. Firmer commodity prices also helped to boost CAD.

Our quantitative models show scope for further CAD gains over the short term, suggesting more gains ahead. Further direction will come from the BoC Monetary Policy Report today, with USD/CAD setting its sights on a test of technical support around 0.9766 in the near term.

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2 Responses to “AUD risks, CHF speculation, CAD upside”

  1. forexsmarter Says:

    Hi Mitul,

    I heard on the Thomson newswire this morning that there was a huge EUR CHF bid over the weekend – something like 20 Billion Euros !! – and yet it appears to have had zero or negligible influence on the EUR CHF spot price, which as you say continues to flounder around the 1.20 floor level set by the SNB.

    Have you any insight into this situation – was this an actual bid, or just a rumour ? I’m keen to know as I have a large long EUR CHF holding, and I’m waiting for the rumoured hike in the minimum exchange rate as it’s going to be a long awaited bonus to my trading account.

    Your comments would be most appreciated.

    Thank you,

    Malcolm Waters

    • Mitul Kotecha Says:

      Hi Malcolm,

      There was a lot of talk of a large bid in EUR/CHF, but as far as I am aware there was no confirmation. Market positioning is still short CHF, with many still looking for a move higher in the EUR/CHF floor. I still think there is a good chance that the SNB move the floor higher from 1.20 closer to 1.25 or higher given the ongoing deflation pressure. An improvement in the KOF leading indicator suggests that the economy is showing some signs of recovery but there is a long way to go and a strong CHF will not help recovery.

      Regards

      Mitul


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